Demand is what matters most for business spending, and demand is doing better

Tax cut or no tax cut, companies could be spending a lot more money in the year ahead.

There was an awkward moment during an onstage interview with White House economic adviser
Gary Cohn
at The Wall Street Journal CEO Council earlier this month. Asked if the tax bill would spur them to boost investment, only a smattering of executive raised their hands. “Why aren’t other hands up?” wondered Mr. Cohn.

But the thing is that companies already have been investing more. Through the first three quarters of this year, capital spending on equipment has risen at a 7.3% annual rate, the fastest pace in three years. The pickup in spending continued in the current quarter: Wednesday the Commerce Department reported that shipments of nondefense capital goods excluding aircraft—something economists look to in order to gauge capital spending—rose 0.4% in October from September. It was the ninth gain in a row for the typically volatile series, marking the longest winning streak since 1994.

Tax-cut or no tax-cut, companies have had the means to invest for a while. Their balance sheets are healthy, and their cost of capital is extraordinarily low. What they needed was a reason, and the biggest reason to invest is demand.

Demand is looking a lot better. The U.S. economy continues to chug along, and for the first time in a long time the rest of the world is chugging along with it. Companies that want to maintain or expand their market share need to keep up, and that requires more equipment. Moreover, a low unemployment rate and the specter of rising labor costs is pushing companies to make their workers more productive.

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There has also been a shift in investor attitudes that is intensifying the need to step up capital spending. For years—indeed, even before the financial crisis struck—investors were rewarding companies that were paying shareholders through dividends and stock buybacks over companies that focused on growth. Lately, however, investors are favoring growth, providing companies with an incentive to get into the club.

For a U.S. economy that for years has relied almost solely on consumers for growth while companies underspent, the pickup in capital spending counts as a good thing. It could help temper any shift lower in consumer spending if households opt to boost their low saving rates. And if it goes on long enough, it could help boost productivity, allowing the economy to move along at a faster clip.